India's Industrial Output Shrinks, Trade Gap Widens

By

Anant Vijay Kala and

Rajesh Roy

Updated Nov. 12, 2012 8:23 a.m. ET

NEW DELHI—India's industrial output unexpectedly shrank in September and its trade deficit expanded to the widest in several years in October, indicating that the worst for the economy isn't over and measures including monetary easing may be needed to revive growth.

Industrial output contracted 0.4% from a year earlier in September, hurt by the poor performance of the manufacturing sector, government data showed Monday. The government also downwardly revised the output reading for August to a 2.3% expansion from 2.7% reported previously.

ENLARGE

A steel factory near Agartala, in the northeastern state of Tripura, Nov. 1.
Agence France-Presse/Getty Images

The September reading fell significantly short of forecasts. The median estimate in a poll of 16 economists was for a 2.82% expansion in output. Even the most pessimistic prediction in the poll was for a 2.40% increase.

Bond prices turned higher on hopes the weak data will add pressure on the Reserve Bank of India to cut rates at its monetary policy review on Dec. 18. The benchmark 8.15% 2022 paper rose to an intraday high of 99.60 rupees from the day's low of 99.50 rupees.

Stocks turned negative and the rupee fell to its lowest level in two months against the U.S. dollar. The Bombay Stock Exchange's Sensitive Index was down 0.1% at 18661.72 in afternoon trade, while the dollar was at 55.11 rupees, compared with 54.75 rupees late Friday.

Factory output has shrunk in five of the seven months through September as high interest rates eat into demand and slow policy reforms hurt investor confidence. Economic growth in India has slowed to its weakest in nearly a decade.

Saugata Bhattacharya, chief economist at Axis Bank, said the contraction reinforces the fact that demand in the economy remains extremely weak. The drop in the output of capital goods and consumer goods was particularly sharp, he added.

C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said the economy could expand 5.5%-6.0% this fiscal year. It grew 6.5% last year, the weakest pace in nine years.

The government will release gross domestic product data for the July-September quarter by the end of November.

Monday, the government also said India's trade deficit in October widened sharply, adding to the gloom.

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India's trade gap rose to $20.96 billion from $18.08 billion in September as the country's heavy dependence on imports to meet its oil needs pushed up overall imports, while weak demand in the U.S. and Europe led to a decline in exports.

Robert Prior-Wandesforde, director of emerging markets economic research at Credit Suisse, said a lot of funding would be needed to meet such wide deficits and authorities will be hoping that opening up the multibrand retail segment to foreign investors attracts some quick capital flows.

"Nevertheless, we wouldn't be surprised if the government were to impose new measures to contain the trade deficit. These could include a further increase in the import duty on gold, for example," he added.

Since September, the government has taken several measures to rein in its widening fiscal deficit and improve investor sentiment in the economy. It raised fuel prices to reduce its subsidy burden and eased restrictions on foreign investment in important sectors such as retail and aviation to attract overseas capital.

It hoped the RBI would cut rates at its October review. But the central bank disappointed the government, keeping rates steady for the fourth consecutive time due to high inflation.

At its last policy review on Oct. 30, the RBI indicated that there was a reasonable likelihood of a rate cut in the January-March quarter as it expects inflation to show a downtrend by then.

However, with the sharp deterioration in industrial performance, the RBI will face greater pressure from industry lobby groups as well as the government to bring forward a rate cut to its next policy review on Dec. 18.

"While fully appreciating the imperative of anchoring inflation, it is CII's view that the RBI now needs to intervene and reduce interest rates since a complete sacrifice of growth is not in the interest of the economy," said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

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